The Theory Of Behavioral Finance

2911 WordsMar 8, 201512 Pages
1. Introduction Efficient market hypothesis had been a topic of significant interest to the academicians, practitioners and the corporate executives for a long period. Under Eugene Fama’s(1965) survey, it is reflected that there is a turning point of the modern finance by efficient market hypothesis. However, there had been a shift in the focus to the theory of behavioral finance (Shiller, 2003) recently. Behavioral finance is the financial structure which supplements various parts of finance (Gallagher, 2003). It is the module which supports and displays the behavior of the investment managers and assists in the overall process of management. Therefore, behavioral finance is a unique art which is required to be selected in order to understand the outcomes of interactions between the investment managers and the corporates. Given this background, this essay examines how the behavioral finance has challenged the efficient market hypothesis and the implications of behavioral finance for investment managers. 2. Definition and concept of efficient market hypothesis According to Eugene Fama’s (1970), with the rise in the information, there is rapid spreading of the information which is immediately incorporated in the security prices. This is called the efficient market hypothesis and it is associated with “random walk” theory. The random walk theory which suggests the randomness of changes in a series of price forms the basis of efficient market hypothesis. Thus, the
Open Document